3 ms·

I'm not sure that is a correct line of logic. Often, companies pump their stock prices by handing over dividends. That's a sign of a mature company, which can't

I'm not sure that is a correct line of logic. Often, companies pump their stock prices by handing over dividends. That's a sign of a mature company, which can't expect to grow much, but is still valuable to its shareholders if it can provide results in any other way.

tedsanders 13y ago
No, if the company pays out dividends, its price ought to fall. For example if a stock is at $100, and then pays out $5 in dividends, afterward the price will be $95. The company is worth less after giving away a pile of its cash.
- mkaziz 13y ago
  What's the logic behind giving out dividends then, if you don't mind me asking?
  - nicholas73 13y ago
    The logic is really stock price management, as I answer above. A secondary reason is simply cash management. You don't want your managers feeling rich and simply wasting money on acquisitions or otherwise splurging on themselves.
- silverbax88 13y ago
  the dividends are not related to stock price- although logically, dividend paying stocks should make a stock more valuable. Dividends are just a portion of profits paid out to public investors. Companies that don't pay dividends on C class stock still pay dividends on other classes of stock.
- nicholas73 13y ago
  It falls on the next day, but over time paying out dividends makes certain kinds of company stock more attractive. Let's run an asymptotic example and say a company has $1000 in cash and $1 per share in profits. Since most of the company is cash you can't buy shares cheaper than $1000. But you might pay say 10x profit and thus the stock price is $1010. If the company had paid out excess cash all along, the stock price would be $10 at 10x profit, and so every $10 you invest would give you a 10% return versus a 0.099% return. So investors absolutely do not want a mature company hoarding cash. This situation is made worse because income investors would have pushed the price perhaps higher than 10x, but instead now punish you by paying less than 10x of profit.
- dragonwriter 13y ago
  Thee is a certain logic there, but it's not reall the logic that drives stock prices. While it's true that the "backing" of a stock is a claim on the assets of the company in the event of dissolution, from which one could infer that distributing assets reduces the value of stock, the reality is that stock purchases are not based on valuation of the company—despite the fact that he whole idea of a market cap presumes they are—but on the expected value realized from the stock stock, which is driven by two things (1) expected payouts while holding the stock, i.e., dividends, and (2) expectations that someone else will be willing to pay more in the future for the stock (largely driven by perception that future growth or potential buyouts are not fully priced into the current market price.) Establishing a practice of paying dividends feeds into #1 to increase the perceived value of holding the stock.
- sliverstorm 13y ago
  Not quite. Future profits have value, and a company paying dividends probably has good future profit prospects. So the value will be somewhere between $100 and $95, depending on expected profits and the time value of money.

tedsanders 13y ago

No, if the company pays out dividends, its price ought to fall. For example if a stock is at $100, and then pays out $5 in dividends, afterward the price will be $95. The company is worth less after giving away a pile of its cash.

mkaziz 13y ago
What's the logic behind giving out dividends then, if you don't mind me asking?
- nicholas73 13y ago
  The logic is really stock price management, as I answer above. A secondary reason is simply cash management. You don't want your managers feeling rich and simply wasting money on acquisitions or otherwise splurging on themselves.
silverbax88 13y ago
the dividends are not related to stock price- although logically, dividend paying stocks should make a stock more valuable. Dividends are just a portion of profits paid out to public investors. Companies that don't pay dividends on C class stock still pay dividends on other classes of stock.
nicholas73 13y ago
It falls on the next day, but over time paying out dividends makes certain kinds of company stock more attractive. Let's run an asymptotic example and say a company has $1000 in cash and $1 per share in profits. Since most of the company is cash you can't buy shares cheaper than $1000. But you might pay say 10x profit and thus the stock price is $1010. If the company had paid out excess cash all along, the stock price would be $10 at 10x profit, and so every $10 you invest would give you a 10% return versus a 0.099% return. So investors absolutely do not want a mature company hoarding cash. This situation is made worse because income investors would have pushed the price perhaps higher than 10x, but instead now punish you by paying less than 10x of profit.
dragonwriter 13y ago
Thee is a certain logic there, but it's not reall the logic that drives stock prices. While it's true that the "backing" of a stock is a claim on the assets of the company in the event of dissolution, from which one could infer that distributing assets reduces the value of stock, the reality is that stock purchases are not based on valuation of the company—despite the fact that he whole idea of a market cap presumes they are—but on the expected value realized from the stock stock, which is driven by two things (1) expected payouts while holding the stock, i.e., dividends, and (2) expectations that someone else will be willing to pay more in the future for the stock (largely driven by perception that future growth or potential buyouts are not fully priced into the current market price.) Establishing a practice of paying dividends feeds into #1 to increase the perceived value of holding the stock.
sliverstorm 13y ago
Not quite. Future profits have value, and a company paying dividends probably has good future profit prospects. So the value will be somewhere between $100 and $95, depending on expected profits and the time value of money.